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  • skinz4q skinz4q Jul 24, 2008 11:00 AM Flag


    This was inevitable. It is also proof positive that those who were blaming the rapid rise in the price of crude on "speculators" are total idiots. Anyone who knows diddly about the futures markets knows that for every long there is an offsetting short position. That's the way that market works. You can't buy something that someone else isn't willing to sell to you because the physical commodity doesn't exist. It's all on paper. There's no such thing as "short interest" as there is with stocks. There is simply what is called the "open interest." The open interest is the total number of long/short positions, because for every long there's a short. While the longs were making money, the shorts were getting killed. The shorts were getting "squeezed" by margin calls which effectively forced them to cover (buy) at higher and higher prices. With that surge of buying now over, the price is free to find a new level of balance that reflects the real fundamental value of the commodity. The market is now falling, in part, because the longs are on the loosing end of the trade for the first time in awhile. If longs start getting margin calls as the price falls - a very real possibility - then a wave of selling might very well ensue. This is the reason that most commodities have maximum daily trading limits, both up and down; to break runaway momentum that could totally destabilize the market. Where the price finally finds a balance point is anyone's guess from here. The shorts who managed to hold onto their positions and take the pain are now starting to feel somewhat better. But they may also feel a little less certain that oil can't make another spike to the upside that could put another squeeze on them. It seems to me that most hedgers (utilities, airlines, truckers, railroads, chemical and other end-product manufacturers such fertilizer companies, etc.) go long the commodity to offset higher prices down the road when they'll need to take physical delivery. I doubt that most of them play the short side of the trade as that would be pure speculation on their part. Oil companies might take that trade if they think the price has risen beyond what is sustainable over the life of the contract. If their short positions go against them they can simply deliver the product at their contract price and move on. Does this make sense?

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